California Apparel News

The U.S. Bankruptcy Court for the Southern District of New York will hold a hearing on Dec. 8 to consider confirmation of CIT Group’s prepackaged reorganization plan.

The New York–based company recently filed for bankruptcy protection after several months pursuing other options for improving liquidity. The company has been struggling through much of the year, and on Nov. 1, CIT Group Inc. filed for voluntary bankruptcy after its board approved a prepackaged plan of reorganization.

CIT’s factoring subsidiary, CIT Trade Finance, was not included in the bankruptcy filing, which included CIT Group Inc. and CIT Group Funding Co. of Delaware LLC.

CIT is the largest factor to the apparel industry. The commercial lender reassured its factoring clients that the filing would not affect their businesses.

“We continue to do business as usual,” said John Daly, president of CIT Trade Finance.

“We remain in constant communication with our clients to ensure that their factoring needs are being met and that they are able to continue to access the services they need to run their business—credit is being approved, invoices are being collected and funds are being remitted. The overwhelming support of our debtholders will serve as a strong tailwind as we work to execute our plan of reorganization in an efficient and expeditious manner.”

It’s not uncommon for a parent company’s bankruptcy to have little impact on subsidiary divisions, said Steven T. Gubner, an attorney with Ezra Brutzkus Gubner LLP in Woodland Hills, Calif.

“Parent [companies] file all the time and their subsidiaries are not affected,” he said. “The costs of putting their operating entities through bankruptcy [would be] astronomical. You’re talking about every particular loan account making advances. It would be absolutely disastrous—both from an operational standpoint and a cost standpoint.”

Recently, CIT announced it had expanded its senior secured credit facility by $4.5 billion. Provided by “a diverse group of lenders, including many of the company’s bondholders,” the new tranche is secured by the same assets as an existing $3 billion credit facility and “additional collateral that becomes available as a result of the company’s refinancing of certain existing secured credit facilities.”

In addition, the company struck an agreement with financier and CIT bondholder Carl Icahn, whose Icahn Capital LP will provide an additional $1 billion line of credit, upon which CIT will draw if it needs additional funds beyond the $4.5 billion expansion facility.

That $4.5 billion credit facility could help the company’s factoring unit operate as usual during the reorganization—although credit may remain tight or get tighter in the coming months.

Gubner said the possibility remains that CIT will sell off some of its subsidiaries, including the factoring unit.

“In these types of situations, it’s not unusual for them to sell off different business units after the parent files,” he said. “The only concern could be that down the road CIT faces liquidity issues—but those issues always exist. One of the concerns we’re seeing is with a new lender coming in with all this new money, there may be more stringent controls on loans that are either in an over-advanced position or are under-collateralized. Whereas in the past borrowers were able to take funds despite their liquidity, they may not be able to do the same.” Proceeding with caution

Gregory N. Weisman, an attorney with Silver & Freedman PLC in Los Angeles, sent an e-mail out shortly after the news broke, advising companies that have concerns about the impact of CIT’s bankruptcy filing to contact their attorney.

But so far, Weisman said, there does not appear to be much panic among apparel makers over the news. This is in contrast to July, when CIT’s financial difficulties began to escalate.

“The hiccup four months ago was they quit lending for a couple of days and everyone panicked,” Weisman said. “This is another announcement that could create apprehension in the minds of factoring clients concerned about CIT’s long-term economic viability. Does it have the money to continue funding over the next 60 days? Will it unsaddle itself from all of this debt?”

CIT’s assurances of continued credit approval and payment on invoices seem to have quelled any remaining fears among its customers.

“People who were skittish largely have already taken off,” Weisman said. “Many businesses have already walked to Wells Fargo Trade Capital and other lenders, but that was a process that started in mid-2008. To CIT’s credit, a lot of its long-term customers have ridden out this turmoil with CIT.”

Weisman warned companies against invoicing directly. “Most contracts provide that CIT owns all the receivables today and tomorrow. Invoices are already assigned. It was done the day they signed [the factoring contract],” he said. Weisman recommended apparel companies factored by CIT contact the commercial lender to find out if there will be any repercussions from the filing. “If they have any apprehension, they should contact their attorney,” he said. “Most CIT contracts are similar, but they are not all the same.”

The news of CIT’s filing came just as the Commercial Finance Association was kicking off its annual convention in Las Vegas. The Commercial Finance Association is a trade group that represents factors and asset-based lenders.

“The Commercial Finance Association is hopeful that CIT’s Chapter 11 filing will result in an orderly process, allowing the company to emerge in a position to continue to support the thousands of small- and medium-sized businesses they have served for years,” said Andrej Suskavcevic, chief executive officer of the association. “It is important to note that the commercial financing industry is a mature, stable and vibrant market sector which is crucial to the global economy. This is evidenced by the steady growth and stability this industry has experienced, even throughout the most recent recession and instability in the credit markets.”